What happens to my pension if my company goes bust?

Will I lose my pension if my company goes bust?

In recent years, a number of big-name companies have gone bankrupt, plunging thousands of employees' livelihoods and, crucially, their retirement savings into turmoil.

This is an incredibly distressing time for people, but there is a safety net to provide some relief - the Pension Protection Fund.

Set up by the government more than a decade ago, the Fund takes over the pension schemes of insolvent companies to ensure workers still get some of their pension.

This guide explains how the Pension Protection Fund works, how much pension you can expect to get if your scheme is in the Fund - and how the cap on pension payments is applied.

What is the Pension Protection Fund?

The Pension Protection Fund is a public corporation which sits within the Department for Work and Pensions.

It pays compensation to people who have a defined benefit or final salary pension with a company that has gone bankrupt.

The Pension Protection Fund will become involved where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.

Companies with defined benefit pensions schemes that become insolvent can apply to have their pension schemes considered for PFF compensation if they meet the relevant rules - this is known is the 'assessment' period.

Is my pension scheme eligible for Pension Protection Fund?

The fund applies to defined benefit schemes and the defined-benefit part of hybrid pensions, which also contains defined contribution and money purchase pensions.

It does not cover public service pension schemes.

For a scheme to enter the Pension Protection Fund the following must apply:

• the company has gone bust after April 2005 and the pension scheme is being wound up after this date
• there must be no chance that your pension scheme can be rescued
• there isn't enough money in the pension scheme to pay the benefits you would get in the Pension Protection Fund

How much of my pension will I get in the Fund?

For those that have retired

This covers people receiving a pension from their scheme before their former employer went bust.

The Pension Protection Fund will usually pay 100% level of compensation, meaning that you shouldn't lose any of your pension.

But how much your pension increases by every year could be affected.

Only payments from your pension built up after 5 April 1997 will rise in line with inflation each year, subject to a maximum of 2.5%.

But payments built up before that date do not increase.

For early retirees and those yet to retire

If you haven't reached retirement age yet, or you retired early, you will receive 90% of your pension in the Pension Protection Fund (previously with a compensation cap).

A Court of Appeal ruling in July 2021 declared the cap unlawful and the PPF no longer applies the cap to new retirees. The 90% proportion of your pension will still be applied.

Pensions rise with inflation each year until you reach your schemes retirement age.

Again, once you start receiving payments, payments from the pension you built up after 5 April 1997 will rise in line with inflation each year, subject to a maximum of 2.5%.

Payments relating to service before that date will not increase.

What is happening with the Protection Fund compensation cap?

The compensation cap applied to PPF payments has now disappeared. In July 2021, the Court of Appeal ruled the PPF compensation cap was unlawful on the grounds of age discrimination.

The table below is provided for advisers who still need to refer to previous calculation tables and factors.

From 1 April 2021, the compensation cap at age 65 was £41,461. The cap was lower if you retired earlier and rose above age 65 for those drawing their pension later.

If you hadn't retired yet, the cap was £37,315 at 65 (which is 90% of the full compensation cap) and the other cap amounts were multiplied by 90% in order to calculate the amount of compensation the member received.

There has also been an 'enhanced' long-service cap for people who have 21 or more years' service in their pension scheme.

The cap has increased by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.

What if my company went bust before April 2005?

The Pension Protection Fund only applies to companies and employers that went bust on or after 6 April 2005.

Prior to that, the Financial Assistance Scheme (FAS) was introduced to cover the pensions in companies that went bust between 6 April 1997 and 5 April 2005.

Similar to how the Pension Protection Fund has operated, it pays out 90% of the benefits you would have received, and a cap of £ 41,888 a year applies. The FAS cap is unaffected by the July 2021 ruling.

For employers that went bust prior to that, there was no formal protection scheme in place. Trustees - a group that manages a pension scheme - were legally obliged to transfer the pension benefits to an insurance company through a 'buy-out'.

There was no legal obligation to do so before April 1997. So if you have a pension in a company that went bust prior to that, you may have lost some or all of your pension.

You can track down old pensions using the government's pension tracing service, to find out which insurer took over your company's pension.

If that doesn't yield any results, you could use Companies House to find the contact details of the administrator or the insolvency practitioner that dealt with the winding up of the company to see if they have any records on what happened to the pension.

Does the Protection Fund cover defined contribution pension?

No. This is because defined contribution and money purchase schemes - which see you pension savings invested on the stock market to grow in a big pot - aren't run by employers.

Instead, they are run by pension companies, usually insurers, which means your money is separate from your employer's finances.

Pension companies should 'ringfence' your pension savings from their own operations, which means that if they went bust, your pension is separated.

However, you can make a claim on the Financial Services Compensation Scheme (FSCS) if your pension company goes bust and is authorised by the City watchdog the Financial Conduct Authority.

The FSCS pension protection checker can help you find out how much protection your scheme has.

What is the Fraud Compensation Fund?

If your employer went bust and the value of the pension fund has lost money because of dishonesty or fraud, there is a separate fund to pay compensation.

This is called the Fraud Compensation Fund. It covers most workplace defined benefit and defined contribution pension schemes (but not personal pensions or the state pension).

Pension Protection Fund: FAQ